There’s been a chorus of commentators and economists predicting big increases in inflation, and SLL has been part of that crowd. However, we don’t mind posting well-reasoned contrary viewpoints. Here’s an analysis of why the crowd might be wrong, from Mike “Mish” Shedlock at thestreet.com:
In its Quarterly Review and Outlook for the First Quarter of 2021 Lacy Hunt makes a case for decelerating inflation.
Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.
After declining 5.2% in 2020, or the most since World War II, world-wide real per capita GDP is estimated to rise 4.7% in 2021. The United States will perform even better, rising 6.2%, after a contraction of 4.9% in 2020. The U.S. growth rate this year could be the fastest since 1984 and possibly even since 1950 (Chart 1).
Five considerations suggest that such growth is not likely to lead to sustaining inflation.
Lacy said 5. I added a 6th bullet point from his discussion, then added 2 more points of my own.
Six Reasons to Expect Disinflation
- Inflation is a lagging indicator, as classified by the National Bureau of Economic Research. The low in inflation occurred after all of the past four recessions, with an average lag of almost fifteen quarters from the end of the recessions. (Table 1 Inflation Troughs Below)
- Productivity rebounds in recoveries and vigorously so in the aftermath of deep recessions. This pattern in productivity is quite apparent after the deep recessions ending in 1949, 1958 and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in the year immediately after the end of these three recessions and unit labor costs were unchanged. The rise in productivity held down unit labor costs.